This is the second part of a multi-part series on Dr Henry Singleton the legendary value investor and founder of the Teledyne empire. Part one of the series can be found at the link below. To ensure you do not miss the rest of the series sign up for our free newsletter.
Part one: The master of capital allocation
Dr. Henry Singleton — Part two: Teledyne
Dr. Henry Singleton’s crowning achievement was the Teledyne empire. Indeed, Henry Singleton built Teledyne from the ground up, turning the company from a single failing military contractor, into one of America’s most profitable conglomerates. Singleton remained CEO of Teledyne from the company’s birth in June 1966, to 1986.
Teledyne
Teledyne reached its peak in the late 70s, early 80s. In July 1979 Forbes magazine published a biography of the company. The article, which goes into more detail than I have room to fit in here, explored the inner workings of Teledyne and the group’s management.
Teledyne was not an average business. Before the company reached its 15 birthday, it was ranked 202nd of America’s top 500 corporations. Before its 19th birthday, the company had surged to 68th out of 500, a record of explosive growth that few other corporations have managed to achieve.
However, the growth, while impressive is not the show-stopping number. In 1978, the company was reported a return on equity of 33%; only two other companies of equal size were able to match this metric. After taxes for the year, the company’s return on manufacturing sales was a third higher than that of other industry peers.
Mr Market
Known as the ‘master of capital allocation’, Henry Singleton made as much use as possible of Mr. Market’s unpredictable and manic depressive nature while he was running Teledyne. During the 1960s, Singleton used what he called ‘Chinese paper’, or Teledyne’s own, high-priced stock in other words to buy up around 125 (or 145, or 130 there are several different estimates) companies to bolt-on to Teledyne. And Most of these companies were left to their own devices after being acquired and as long as the companies were generating cash, Henery Singleton didn’t interfere.
However, during the 70s, Teledyne’s stock lost its appeal and started to fall. Investors were also concerned about antitrust regulators scrutiny of conglomerates. But Henry Singleton, the master of capital allocation saw no reason to be worried. So, with a falling stock price he stopped buying other companies, and Teledyne started buying back its own stock.
“In October 1972 we tendered for 1 million shares and 8.9 million came in. We took them all at $20 and figured that was a fluke and that we couldn’t do it again. But instead of going up, our stock went down. So we kept tendering, first at $14 and then doing two bonds-for-stock swaps. Every time one tender was over the stock would go down, and we’d tender again and we’d get a new deluge. Then two more tenders at $18 and $40.”
The single most surprising thing about this capital return was that it wasn’t achieved by sacrificing top line growth. Teledyne continued to grow rapidly while conducting tender offers.
With spare cash being spent on tender offers, Teledyne grew organically throughout the 70s. Revenues of $1.2 billion were reported for 1970, by 1974, revenues hit $1.7 billion. Two years later, revenues had jumped a further 12% to $1.9 billion. By 1979, revenues hit $2.6 billion.
From 1969 through to 1978 Teledyne’s revenue jumped 89%, net profit more than triple and earnings per share, thanks to the constant tender offers soared 1,226%. And throughout this period, despite pressure from shareholders, Henry Singleton famously refused to pay a dividend. Indeed, he believed that shareholders wouldn’t look after the cash effectively, so it was better to keep the cash in the business and use it for tender offers and debt payments. After all, Teledyne could reinvest earnings at over 30%; a higher rate than could be achieved elsewhere.
“To begin with he asks, what would the stockholder do with the money? Spend it? Teledyne is not an income stock. Reinvest it? Since Teledyne earns 33% on equity he argues, he can reinvest it better for them than they could themselves. Besides, the profits have already been taxed; paid out as dividends they get taxed a second time. Why subject the stockholders money to double taxation?…
…Singleton says: “Our people don’t want any more income. They want to see increases in the book value and ultimately in the price of the stock when the underlying buildup in values is reflected”…– Forbes 1979.
An investor who put money into Teledyne stock in 1966 achieved an annual return of 17.9% over 25 years, or a 53x return on invested capital vs. 6.7x for the S&P 500, 9.0x for GE and 7.1x for other comparable conglomerates.Teledyne’s earnings soared 11 times faster than the average Dow Jones stock. As the single largest investor in Teledyne, Henry Singleton chose to make money alongside his fellow investors not from them. He never granted himself options.
It should be noted that Teledyne to borrowed heavily during its tender offer spree. The buybacks weren’t entirely financed by cash flow. But this debt was soon repaid. When Teledyne’s stock price was attractive, Henry Singleton borrowed as much as he could to take advantage, buying up as much stock as he could get his hands on. The debt would then be paid off using free cash flow during the following years. In addition, while paying off debt, Henry Singleton wiped out all of Teledyne’s convertibles and warrants, eliminating all possible dilutive factors at the same time.
It seems as if Singleton made Teledyne into the perfect, shareholder friendly company.
Breaking the rules
Teledyne wasn’t just a stand-out company in terms of returns. The group also broke the rules when it came to many other areas of business. For example, the board of directors only consisted of six members, all of them close friends. Underneath the directors, 150 managers worked, all of whom were insiders. The company rarely had to reach outside for additional talent.
The group was run using a bottom-up approach. Each business acquired was left under the control of the existing management team already in place and reported to one of several ‘small profit centers’, which then reported to upper management.
And Teledyne liked to split businesses up, often into companies with only a few million dollars in annual sales. The thesis behind this fragmentation was to try and uncover problems that would have been overlooked if the company were part of a larger group within the Teledyne conglomerate. Splitting up businesses also reduced the chance that the failure of a single business unit would bring down the whole Teledyne empire.
For many managers, this approach would have been too time-consuming but Teledyne was a the forefront of technological development and the company made use of the best computer models and accounting software available at the time. In 1979, the group had a network of computer controls, setting standards for each divisional manager, which allowed then President, George Roberts, to assess the financial reports of up to five companies every day.
Misguided
Unlike many other business managers, even today, Henry Singleton emphasized cash above all other metrics when he was at Teledyne. Singleton didn’t’ pay a dividend to shareholders because he believed that reinvesting Teledyne’s profits would be a better use of funds; however, Henry Singleton demanded cash dividends from all 129 of his company managers. And, using this cash-based business model, Singleton formed a pay strategy to compensate his managers according to the cash dividends they paid Teledyne. The higher the percentage dividend paid to Teledyne, the higher the manager’s salary and bonus. Bonuses’ frequently exceeded 100% of base salary.
Perhaps this was Teledyne’s only downfall. The company was overly focused on profit rather than product. For 1979, the year of the Forbes interview, the company was planning to spend only $100m, or a third of operating cash flow on capital spending despite reporting revenues of around $2 billion.
Still, this fiscal prudence and attention to detail really paid off for Teledyne and allowed the company to squeeze every bit of profit out of its operations, giving the company the best profit margins around, nothing was wasted.
The downfall
Eventually, Teledyne’s growth slowed, and the business was broken up as the conglomerate structure become outdated and inefficient. Stay tuned for part three of this series: Teledyne the downfall.
The post Dr Henry Singleton — Part Two: Teledyne appeared first on ValueWalk.
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